Businesses and individuals have been getting tax notices more than ever before, earning the Indian tax administration a reputation of being one of the most aggressive in the world.
This is the natural outcome of tax cuts given in the crisis period of FY09 and FY10, which, together with delays in direct and indirect tax reforms, have forced authorities to focus more on tax-collection efficiency to meet the target.
A key factor that influenced tax receipts is the high interest cost that depressed corporate profitability. Net profitability of businesses and trade has been coming down due to rising inflation and cost of borrowed funds in an economy that is expanding at nearly half the rate it used to five years ago.
Factors of inflation, however, do not affect salaries that contribute to personal income-tax collections. This class of tax has been growing faster than corporate tax receipts in the last five years, except in FY11. Unlike businesses, individuals cannot deduct their interest cost from the taxable income, except in a very limited manner. The I-T department has also been using technology and diverse sources of information for a thorough profiling of individual taxpayers to check evasion. Notices were sent to more than 12 lakh people this fiscal who executed large transactions but did not file tax returns.
Corporate tax collection growth rate fell to single digits in FY14 while growth in personal income-tax receipts moderated. Among indirect taxes, excise collection growth at 4.38% in FY14 reflected the bleak fortunes of the manufacturing sector.
Although the Direct Taxes Code (DTC) that seeks to phase out profit-linked tax-breaks is still to get Parliament approval, the government has introduced terminal dates on most income-tax breaks in the existing law itself. Also, the new concepts introduced in the code, such as the General Anti Avoidance Rules and Advance Pricing Agreements, have already been adopted in the existing Income-Tax Act.
Indirect taxes, comprising central excise, customs and service tax, recovered from the contraction seen in the crisis-ridden FY10 when rates were kept low to manage inflation and to fiscally stimulate the economy. However, sluggish economic growth has seen central excise and service tax collections reach just above half of their full-year targets in the first three quarters. Customs duty collections in the April-December period has been robust on account of rupee depreciation and accounts for two-thirds of the full-year target.
A political consensus on introducing the Goods and Services Tax (GST) is still elusive, but the strategic policy is to expand the tax base, reduce exemptions and to moderate tax rates.
